Individuals having less than optimal credit in need of a short-term loan often turn to high-interest payday loan services. Payday loans are typically a small, short-term loan that is intended to cover a borrower's expenses until his or her next payday. Finance charges on payday loans are typically in the range of 15 to 30 percent of the amount for the borrower's pay period (e.g., two weeks). This translates to an annual percentage rate (APR) between 390 percent and 780 percent. The process by which a payday loan is originated is fairly straightforward. The borrower writes a postdated check to the lender for the full amount of the loan plus fees and interest. On the maturity date, the borrower is expected to return to repay the loan in-person. If the borrower does not repay the loan, the lender may process the check traditionally or through electronic withdrawal from the borrower's checking account.
In the United States, regulation of lending institutions is handled primarily by individual states. While payday lending is legal in a majority of states, laws that prohibit payday lending are usually in the form of usury limits, i.e., interest rate caps calculated strictly by APR. However, payday lenders have succeeded in avoiding usury laws in by forming relationships with nationally chartered banks based in states with no usury ceiling. Further, many borrowers find they repeatedly borrowing from payday lenders to make ends meet. As such, they fall victim to the high fees and interest rates and find it difficult to stay on a path of financial stability.